Chapter 6 Supply Chain Integration McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Dell Desktop PC Supply Chain: Case Study Optimizing the Flexibility of the Desktop PC Supply Chain ©2006 Massachusetts Institute of Technology. All rights reserved. Agenda • L6 vs. L5 Value Comparison • Root Causes Analysis • Project Methodology & Next Steps • Lessons Learned 3 Critical Components of a Desktop PC & Major Component Manufacturers Chipset AMD Intel Printed Circuit Board BTI Electronics Compeq GCE Plato Electronic LAN Chip Broadcom Intel Motherboard ASUS Foxconn Intel MiTAC Desktop PC Acer Apple Dell Fujitsu Siemens Gateway HP Lenovo/IBM Desktop Chassis ASUS Flextronics Foxconn 4 MiTAC Company list is not comprehensive. Lite-On Images used on this page belong to the respective companies. L6 vs. L5 L6 MB China Integration 5 Weeks Chassis Supplier Logistics Center Dell Customer Manufacturing 3rd Party Integrator L5 (managed by Equipment Manufacturers) : L5 additional cost MB 1 Week Dell Chassis 5 Weeks Supplier Logistics Center Manufacturing Customer Problem Statement Since July 2004, Dell and its contract manufacturers (CMs) have had to adapt an increasing % of L5 manufacturing: 1. Empty chassis are shipped by ocean (L5) to Dell US & Europe first. Motherboards are then air-freighted to Dell US & Europe. 2. Dell incurs motherboard expedite/air-freight cost and 3rdparty integration cost. 3. CMs incur cost for idle labor dedicated for MB-chassis integration. 6 L6 vs. L5: Value Comparison L6 L5 • Integrated offshore & outside a Dell facility • Integrated inside a Dell facility • Integrated motherboard-inside chassis shipped on water • Chassis shipped on water • Motherboards shipped by air + Labor savings + Increased supply chain flexibility + MB air-freighting costs are eliminated + Reduced motherboard packaging costs – Increased motherboard airfreighting costs – Reduced supply chain flexibility – 3rd-party integration cost in US – More motherboards need to be re-worked in the event of an MB ECN – Separate logistical costs for chassis and motherboards L6 is more cost-effective than L5. 7 L5 Driving Increasing Operational Cost MB-Airfreighting & 3PI Integration Costs Costs of air-freighting MBs and 3PI integration have been increasing. Worldwide Procurement Expedite Council established Q3FY05 Act Q4FY05 Act Q1FY06 Act Americas EMF Q2FY06 Act APJ MDS Q3FY06 Act Q4FY06 FCST Total AMF includes 3PI integration cost. EMF and APJ don’t as integration is done in Dell factory. 8 L6 vs. L5 Shipments: % Comparison L5% Dell Worldwide L5 vs. L6 Shipments Received L6% from a Typical Contract Manufacturer 100% 11% 7% 6% 5% 4% 14% 90% 9% 6% 4% 10% 15% 27% 80% L5 shipped % has been increasing since March 2005. 70% 60% 50% 89% 93% 94% 95% 96% 86% 40% 91% 94% 96% 90% 85% 73% 30% 20% 10% 0% Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 9 Root Causes Analysis Majority of expedites are caused by chipset supply shortage. 3.8% 8.3% Chipset supplier decommit or supply issues Quality/Eng Issues 24.5% Dell Forecast Accuracy 63.5% NPI AMF Expedite $ by Root Cause (January to June ’05) 10 Project Scope Is Is Not Desktops Laptops, servers, storages, peripherals DAO (Dell America Operation) Outside DAO Constrained by chipset supply shortage To improve chipset supply Focused on factory To improve Dell’s demandoperational improvement forecasting ability Motherboard-chassis integration Fans, power supply, SPAMS (Speakers, Printers, Advanced Port Replicators, Monitors, Scanners), or other components 11 Project Methodology BPI project team established to evaluate the following 6 scenarios: 1. Keep as current: 3rd-Party Integrator (3PI) managed by Equipment Manufacturers 2. DAO Cellular Integration: Enable the Dell factory work cells to perform L5L10 mfg work 3. Offline Integration: Keep the current L6L10 mfg process unchanged; add a separate facility to handle MB-chassis integration work a. At SLC (Supplier Logistics Center) b. At a Dell-leased building 4. 3PI managed directly by Dell 5. L6 from Equipment Manufacturers’ Mexico plants 12 Factors to Considered For each of the 6 scenarios, BPI project team assessed the following attributes: 1. Process smoothness & sustainability 2. Cost per box 3. Product quality 4. Capital investment 5. Material handling/cost-accounting 6. Logistics Project Goal: Identify the optimal scenario based on these input attributes. 13 Complexity Analysis Worldwide Procurement Regional Procurement Master Scheduler Production Control Operations DAO Quality Processing Engineering Supplier Quality Eng (Regional) Supplier Quality Eng (Global) Cost Accounting Inventory Control Logistics Total: Cost per Box Option 2 Option 2 Option 1 (original) (revised) 1 1 10 5 5 8 5 5 5 10 10 5 10 10 1 10 10 5 10 10 1 Option 3A 1 5 5 7 5 5 5 Option 3B 1 5 5 7 5 5 5 Option 4 5 5 5 7 1 1 1 Option 5 10 10 5 5 1 1 1 10 1 1 1 1 5 7 1 5 1 5 57 $10.07 1 1 5 1 60 $7.00 1 1 5 1 60 $7.90 1 10 5 5 55 $7.54 1 10 7 5 57 $7.70 1 10 10 5 56 $7.61 10 1 1 10 62 $7.00 Legend: The “Cost per Box” data has been modified to respect Dell’s data confidentiality. Option 1: EM-managed 3PI Option 2: Integration at DAO work cells Option 3A: Integration at SLC/hub Option 3B: Integration at Dell-leased bldg Option 4: Dell-managed 3PI Option 5: Integrated chassis from Mexico 14 Option 2 vs. 4: Value Comparison Option 2: Integration at DAO Work Cells Option 4: Dell-managed 3PI + Lower capital expenditure investment + Dell has direct control over the 3PI + Less impact to business if chipset supply reverts to 100% L6 + More clear definition of quality issues ownership + Fit the Dell Direct model better – Builder headcount is more difficult to scale + Less manufacturing infrastructure change required, less impact on existing supply chain network – Increased inbound & scheduling complexity + Little additional capital expenditure investment, little lead time change – More part numbers to manage – Only an incremental change from the original manufacturing design – Factory thru-put rate is downgraded Option 4 enables Dell to focus on the more valueadded portion of the MB-chassis integration. 15 Lessons Learned 1. Supply chain coordination requires involvement from all partners in the chain (customer, supplier, sub-tier suppliers). 2. A well-planned strategy complements strong operational execution ability from supply chain partners. 3. Change management requires 3 key ingredients: • Top-down leadership • Bottom-up engagement • Cross-functional coordination 4. Qualitative judgment is just as important as or more critical than quantitative analysis. 5. Working in a bi-lingual/bi-regional setting has its perks and challenges. 16 Discussion and Q&A Questions and Thoughts 17 Back-up 18 Manufacturing Costs: L5 > L6. Costs Common to L5 and L6 Costs of doing either L5 or L6: Raw material costs China materials transportation costs China assembler's cost (Foxconn performing L1-->L5) Chassis ocean-shipping cost Chassis US transportation cost (trucks, rail) Chassis inventory holding cost at SLC US assembler's cost at Dell (from L7-->L10) Type Materials Logistics Labor Logistics Logistics Inventory Holding Labor L6 Only Costs L5 Only Costs Costs of doing L6, rather than L5: China assembler's cost (Foxconn performing L6) Costs of doing L5, rather than L6: Motherboard packaging cost Motherboard air-freight/expedite cost Motherboard US transportation cost Motherboard inventory holding cost at SLC Chassis & motherboard US transportation cost (from SLC to local/regional integrator and back) Local/regional integration cost (Accurate, Saberex) Motherboard rework cost at Dell Dell L5 mgmt cost (e.g. Expedite Council) Type Labor Type Materials Logistics Logistics Inventory Holding Logistics Labor Labor/Quality Labor 19 Pros & Cons of the 6 Options 1 Description Pros Cons Current Process, EMmanaged 3PI • Least impact for Ops & PE • Most expensive option • Dell does not own inventory during MBchassis integration at 3PI • WWP and Regional Procure. have more intense EM and 3PI mgmt/coordination • Most difficult option for SQE 2 L6 at Dell work cells • Less complex for WWP • Long ramp time of new builders • SQE mgmt is reduced • Difficult for PC to run deviations of both L5 and L6 in one process simultaneously • L5 and L6 parts are ordered and tracked independently clear-cut Cost Accounting • Easiest option for Logistics • Work cells config need to change Greatest impact for Ops and PE • Less complex for WWP • Most complex for Cost Accounting • SQE mgmt is reduced • Extra PC and IC headcounts required • DAO Quality concern from an L5-L6 hybrid mfg model 3 A L6 at Dell SLC 3 B L6 at Dellleased external location • Less complex for WWP • Most complex for Cost Accounting and IC • SQE mgmt is reduced • Extra PC and IC headcounts required Dell-managed 3PI • Easiest option for Ops & PE L6 from EM (China, Mexico, and/or elsewhere) • Lowest possible cost compared to China L6 4 5 • Requires additional lease commitment • DAO Quality expected to improve as Dell directly manages 3PI • Most complex for Cost Accounting and IC – difficult to manage Parts Cost at a Dell-managed 3PI • Overall easiest option for Dell • Requires Regional Procure. to manage L6 out of EM facilities from China, Mexico, and possibly other regions. • Most manageable for Master Sch./COC, PC, IC, Ops, and DAO Quality 20 • Multi-regional logistics coordination is a concern. • Increased SQE mgmt 6.1 Introduction Effective SCM implies: Improve performance: reduce cost, increase service level, reduce the bullwhip effect, better utilize resources, and effectively respond to changes in the market place. Challenges can be met by integrating: Efficient integration of suppliers, manufacturers, warehouses, and stores. Coordinate activities across the supply chain the front-end, customer demand, to the back-end, production and manufacturing portion of the supply chain. Various supply chain integration strategies: Push, pull, push–pull strategy. Matching products and industries with supply chain strategies. Demand-driven supply chain strategies. The impact of the Internet on supply chain integration. 6-21 6.2 Push, Pull, Push-Pull Systems Push and Pull traditional categories of manufacturing operations More recent hybrid strategy of combining the two, Push-Pull systems 6-22 Push-Based Supply Chains Production and distribution decisions based on long-term forecasts. Manufacturer demand forecasts based on orders received from the retailer’s warehouses. Longer reaction time to changing marketplace: Inability to meet changing demand patterns. Obsolescence of supply chain inventory as demand for certain products disappears. Variability of orders received much larger than the variability in customer demand due to the bullwhip effect. Excessive inventories due to the need for large safety stocks Larger and more variable production batches Unacceptable service levels Product obsolescence 6-23 Bullwhip Effect in Push-Based Supply Chains Leads to inefficient resource utilization Planning and managing are much more difficult. Not clear how a manufacturer should determine production capacity? Transportation capacity? Peak demand? Average demand? Results: Higher transportation costs Higher inventory levels and/or higher manufacturing costs more emergency production changeovers 6-24 Pull-Based Supply Chains Production and distribution demand driven Coordinated with true customer demand rather than forecast demand firm does not hold any inventory and only responds to specific orders. Intuitively attractive: Reduced lead times through the ability to better anticipate incoming orders from the retailers. Reduced inventory since inventory levels increase with lead times Less variability in the system Decreased inventory at the manufacturer due to the reduction in variability. 6-25 Implementation of Pull-Based Systems Often difficult to implement when lead times are long impractical to react to demand information. more difficult to take advantage of economies of scale Advantages and disadvantages of push and pull supply chains: new supply chain strategy that takes the best of both. Push–pull supply chain strategy 6-26 Push-Pull Strategy Some stages of the supply chain operated in a push-based manner typically the initial stages Remaining stages employ a pull-based strategy. Interface between the push-based stages and the pull-based stages is the push– pull boundary. 6-27 Supply Chain Timeline FIGURE 6-8: Push-pull supply chains 6-28 General Strategy Make a part of the product to stock – generic product The point where differentiation has to be introduced is the push-pull boundary Based on extent of customization, the position of the boundary on the timeline is decided 6-29 Identifying the Appropriate Supply Chain Strategy FIGURE 6-9: Push-pull supply chains 6-30 Impact of Demand Uncertainty and Economies of Scale Demand Uncertainty: Higher demand uncertainty leads to a preference for pull strategy. Lower demand uncertainty leads to an interest in managing the supply chain based on a long-term forecast: push strategy. Economies of scale: The higher the importance of economies of scale in reducing cost The greater the value of aggregating demand The greater the importance of managing the supply chain based on long-term forecast, a push-based strategy. Economies of scale are not important Aggregation does not reduce cost A pull-based strategy makes more sense. 6-31 Implementing a Push–Pull Strategy Achieving the appropriate design depends on many factors: product complexity manufacturing lead times supplier–manufacturer relationships. Many ways to implement a push–pull strategy location of the push–pull boundary. Dell locates the boundary at the assembly point Furniture manufacturers locate the boundary at the production point 6-32 Impact of the Push-Pull Strategy Push portion Low uncertainty Service level not an issue Focus on cost minimization. Long lead times Complex supply chain structures Cost minimization achieved by: better utilizing resources such as production and distribution capacities minimizing inventory, transportation, and production costs. Supply Chain Planning processes are applied. 6-33 Impact of the Push-Pull Strategy Pull portion High uncertainty Simple supply chain structure Short cycle time Focus on service level. Achieved by deploying a flexible and responsive supply chain Order-fulfillment processes are applied 6-34 Characteristics of the Push and Pull Portions of the Supply Chain Portion Push Pull Objective Minimize cost Maximize service level Complexity High Low Focus Resource allocation Responsiveness Lead time Long Short Processes Supply chain planning Order fulfillment 6-35 Interactions of the Two Portions Only at the push-pull boundary Typically through buffer inventory Different role for the inventory in each portion In the push portion, buffer inventory is part of the output generated by the tactical planning process In the pull system, it represents the input to the fulfillment process. Interface is forecast demand Forecast based on historical data obtained from the pull portion Used to drive the supply chain planning process and determine the buffer inventory. 6-36 6.3 The Impact of Lead Time Longer the lead time, more important it is to implement a push based strategy. Typically difficult to implement a pull strategy when lead times are so long that it is hard to react to demand information. 6-37 Impact of Lead Time FIGURE 6-10: Matching supply chain strategies with products: the impact of lead time and demand uncertainty 6-38 Impact of Lead Time Box A Box B Items with short lead time and high demand uncertainty Pull strategy should be applied as much as possible. Items with long supply lead time and low demand uncertainty. Appropriate supply chain strategy is push. Box C items with short supply lead time and highly predictable demand. Continuous replenishment strategy Suppliers receive POS data They use these data to prepare shipments at previously agreedupon intervals A pull strategy at the production and distribution stages and push at the retail outlets. Box D Items with long lead times are long and unpredictable demand Inventory is critical in this type of environment Requires positioning inventory strategically in the supply chain 6-39 6.4 Demand-Driven Strategies Requires integrating demand information into the supply chain planning process Demand forecast: Use historical demand data to develop long-term estimates of expected demand Demand shaping: Firm determines the impact of various marketing plans such as promotion, pricing discounts, rebates, new product introduction, and product withdrawal on demand forecasts. 6-40 Forecast Errors Are Always Present! High demand forecast error has a detrimental impact on supply chain performance Approaches to improve accuracy Aggregate forecasts are more accurate, Use market analysis and demographic and economic trends to improve forecast accuracy (see Chapter 2 for details). Determine the optimal assortment of products by store Select the push–pull boundary so that demand is aggregated over one or more of the following dimensions: Across products/geography/time Reduce the number of SKUs competing in the same market. Incorporate collaborative planning and forecasting processes with your customers Demand forecast by SKU by location has to be supported by the supply chain Interaction of demand planning and tactical supply planning Iterative process 6-41 6.5 The Impact of the Internet on Supply Chain Strategies Expectation that increasing use of the internet would solve a lot of the business problems Reality was very different Many of the problems in the internetbased businesses were related to logistics strategies 6-42 Successes and Failures Notable Failures Furniture.com Peapod.com Notable Successes Amazon.com Hybrid of successes and failures Cisco $2.2B inventory write-off in 2001 Has been successful in leveraging the internet subsequently 6-43 E-Business E-business: a collection of business models and processes motivated by Internet technology and focusing on improvement of extended enterprise performance. E-commerce: ability to perform major commerce transactions electronically. 6-44 Key Observations e-commerce is only part of e-business. Internet technology is the force behind the business change. Focus on the extended enterprise Business-to-consumer (B2C) “direct to customer,” Retail activities over the Internet, and includes products, insurance, banking, and so forth. Business-to-business (B2B) Conducted over the Internet predominantly between businesses. Includes: electronic sourcing (the so-called eSourcing) reverse auctions collaboration with suppliers and vendors to achieve common goals. 6-45 Grocery Industry Typical supermarket employs a push-based strategy Peapod was built on pure pull strategy with no inventory and no facilities. Significant service problems with high stockout rates Changed to a push–pull strategy by setting up a number of warehouses Warehouse covers a large geographical area Other challenges: Aggregated demand Reducing transportation costs Short response time Low customer density Products have low demand uncertainty high economies of scale in transportation cost push-based strategy is more appropriate. 6-46 Book Industry Initial model of Amazon.com a pure pull system with no warehouses and no stock. Ingram Book Group supplied most of Amazon’s customer demand. As volume and demand increased: Amazon.com’s service level was affected by Ingram Book’s distribution capacity Using Ingram Book in the first few years allowed Amazon.com to avoid inventory costs but significantly reduced profit margins. Current Amazon.com: As demand increased distributor no longer required. Several warehouses around the country where most of the titles are stocked. Inventory at the warehouses is managed using a push strategy Demand satisfied based on individual requests, a pull strategy. Slow moving low volume books and CDs are not stocked at Amazon distribution centers Amazon orders those when demand arrives. 6-47 General Retail Industry Late to respond to competition from virtual stores and to recognize the opportunities provided by the Internet. Brick-and-mortar companies are adding an Internet shopping component to their offering. Already have the distribution and warehousing infrastructure Click-and-mortar firms High-volume, fast-moving products stocked in stores Push strategy Low-volume, slow-moving products are stocked centrally Push-Pull strategy 6-48 Traditional Fulfillment Versus eFulfillment Traditional fulfillment E-fulfillment Supply chain strategy Push Push–pull Shipment Bulk Parcel Reverse logistics Small part of the business Important and highly complex Delivery destination Small number of stores Large number of geographically dispersed customers Lead times Relatively long Relatively short 6-49 Summary Implementation of push-pull strategies and demand-driven strategies have helped many companies to improve performance, reduce costs, increase service levels. Collapse of many Internet companies shows that e-business has great challenges. Companies need to: Identify the appropriate supply chain strategy for individual products. Case for no physical infrastructure or inventory is tenuous Push–pull strategy advocates holding inventory although it pushes the inventory upstream in the supply chain. 6-50